China's Least-Favorite Short Seller Targets Singapore

Estimated decline in the value of Temasek’s stake in Olam since Block attacked the peanut company: $100 million

The short-seller who made his reputation by savaging Chinese companies is turning his attention elsewhere. Carson Block, 36, whose research helped erase almost $7 billion of market value in China since 2010, says Olam International (OLAM:SP), the Singapore-backed commodity merchant responsible for 90 percent of the world’s peanut trade, is a sham doomed to fail. “Comparisons to Enron are overused, but in the case of Olam, the similarities really are uncanny,” Block wrote in a Nov. 26 report to clients of his Los Angeles-based firm, Muddy Waters Research, which is shorting the peanut company. “We believe that the single biggest factor in Enron’s collapse was its use of accounting techniques similar to Olam’s value gains.” Olam’s U.S.-traded shares began a 20 percent plunge minutes after Block trashed the company at a Nov. 19 cancer benefit in London. According to Block, Olam uses noncash accounting gains to boost earnings, has been “burning cash,” and will need to raise or refinance as much as S$4.6 billion ($3.78 billion) of debt in the next year to stay solvent. Two days later, Olam, which has a market valuation of S$3.49 billion, sued Block and his firm for defamation in the Singapore High Court.

When he called out Olam, Block wasn’t just challenging the world’s dominant peanut company. He was also taking on Temasek Holdings, the Singapore sovereign wealth fund run by Ho Ching, the wife of the city-state’s prime minister. Temasek, which has S$198 billion in assets, is Olam’s second-largest shareholder, with a 16 percent stake. That stake has lost more than $100 million in value since Muddy Waters first questioned Olam’s finances.

Olam Chief Executive Officer Sunny Verghese dismisses Block’s claims as a means to “create panic,” citing more than S$10 billion of balance-sheet liquidity. On Dec. 3, Temasek said it would buy any unpurchased Olam bonds in its recent $1.25 billion offering. In a statement, Temasek’s senior managing director of investments, David Heng, said the fund’s executives are “comfortable with Olam’s credit position and longer-term prospects, and are pleased to have another opportunity to invest in the company, alongside other shareholders.” Temasek declined to comment further for this story.

Block shorts companies he claims are guilty of inconsistencies in their financial reporting or of outright fraud. “The Carson Block model of very detailed reports has set a new standard,” says Sahm Adrangi, who manages $125 million at New York-based hedge fund Kerrisdale Capital Management. Muddy Waters reports critical of Chinese firms listed on U.S. exchanges helped drive down the shares of eight companies, some with ties to the Chinese government, by an average of 60 percent, according to data compiled by Bloomberg. Shares of Sino-Forest, which had a market value of about $6.1 billion, slumped 74 percent before the company filed for bankruptcy in March. (Temasek was a major investor.) Muddy Waters’ most recent shorts in China failed to pay off, though: Despite Block’s allegations of fraud, Beijing-based wiremaker Fushi Copperweld (FSIN) gained 25 percent on the Nasdaq this year after the China Development Bank loaned it money to buy back shares.

This year, Block says, he stopped betting against Chinese companies because government agencies, including the Ministry of State Security and the Public Security Bureau, are harassing his analysts and limiting their research. The Ministry of Public Security didn’t respond to requests for comment. A person who answered the Ministry of State Security’s listed number said the ministry does not handle media inquiries via phone or fax.

Block isn’t expecting such problems in Singapore. The Olam work should go more smoothly, he says. “We do not believe that Singapore is a thugocracy,” he said in an e-mail. The stakes are high, though, says Low Chee Keong, a professor of corporate law at the Chinese University of Hong Kong. “Carson Block is putting his whole reputation on this one,” Low says. “He’s taking on the Singapore government, Singapore Inc. here.”